Monday, May 30, 2011

A Second Bailout for Greece: Some Numbers

Reuters reports that EU officials are discussing the possibility of a second loan to Greece: “EU officials said a new 65 billion euro package could involve a mixture of collateralized loans from the EU and IMF, and additional revenue measures, with unprecedented intrusive external supervision of Greece's privatisation program.” Why €65 billion and what does this accomplish?

Greece’s problem is that it is engaged in a race: it needs to convince markets that it has a credible plan out of the crisis by March 2012 (see here). If by that point it cannot borrow at sensible interest rates, it will be forced to default. According to the latest IMF report – which is out of date and based on deficit statistics that were subsequently revised – Greece would need to raise €26.7 billion from long-term bonds in 2012 and €37.9 billion in 2013 (see here).

These numbers, however, were also based on a very low assumption for privatization receipts: €8.5 billion in 2011-2013 (see here and here). The long-term macroeconomic framework that the government has introduced already targeted €15 billion from privatizations by 2013. To reach the higher goal of €50 billion by 2015, the government would have to do even more than that, which mean its need to borrow money would be lessened.

Now bring in €65 billion: on the surface, this money basically insulates Greece from the need to borrow long-term until 2014. However, depending on whether Greece would be able to raise sufficient funds from privatizations, and whether these receipts would be used to pay down debt or just the second €65 billion (as per the Reuters quote above), Greece could even nudge towards mid to late 2014 for when it would need to raise financing again.

According to the economic forecasts, Greece was slated to exit the recession by mid to late 2011. These forecasts showed GDP falling by 3% in 2011 but then starting to grow by 1.1% in 2012, 2.1% in 2013 and 2.1% in 2014. In other words, the crunch time for Greece to borrow again would come at a much better economic moment, making convincing markets much easier.

The added benefit would be that by 2013, the EU will have a more permanent mechanism for dealing with heavily indebted countries (if I may call them HIEC, the Heavily Indebted Eurozone Countries). However, if the troika extends another €65 billion to Greece, then by 2013, it will hold around 45% of Greece’s debt.

Readers of this blog will know that I always come back to one question: what does this mean for reform? My sense is that of all the outcomes, this helps reform the most. A default is no solution to the real problems plaguing the country (see here, here and here). An extra two years buy the government time, and they also provide an important external stamp on what it is trying to accomplish. Relieved of the pressure of having to borrow in 2012, the government can more easily plan for a full four-year term, scheduled to end in late 2013. Obviously this is all very premature – we do not know if there is indeed a second bailout discussed or what its terms may be. But overall it seems to be of the size that would be needed to insulate Greece from market forces for a few more years.

Sunday, May 29, 2011

Is Spiegel Right that Greece is Missing All its Fiscal Targets?

Reports by Spiegel have said that the latest IMF/EC/ECB report – which is still being compiled – “asserts … that Greece had missed all its agreed fiscal targets.” Obviously we do not know what is being discussed behind closed doors. But a close look at the numbers shows that the statement is simplistically incomplete at best.

So far, the Greek government has published Budget Execution Bulletins for the first four months of the year (see here). If one takes a high level approach to the numbers, then Spiegel is certainly correct: the deficit has increased by 13.7% in the first four months of the year against an annual target of minus 3.9%. The damage is done mostly on the revenue side with a 9.1% decline versus an annual target of plus 8.5%. Expenditures, however, have done better than expected: they increased by 3.6% versus a target increase of 6.6% (half of the target increase comes from interest payments).

But this is not the whole story: budgets at not linear instruments, and not all months are equal. So it is important to think about the deficit cycle. The following graph, recreated from the Budget Execution Bulletin, is quite revealing. It shows that although the Greek deficit is off target on an annual basis, it is right on target on a seasonal basis: only in April does the deficit get off track by €322 million. (Yes, the deficit targets in April are the same as the targets published earlier in the year - see here). From January to March, the deficit was right on target despite seeming off target when looking at annualized targets.

This is not to say that Greece will or will not meet its deficit targets. After all, Greece’s 2010 targets shifted constantly (see here). But my point is that when journalists report on whether Greece is on target or not, they should really spend the extra two minutes to scroll down to the bottom on an eight-page document and see for themselves.

Saturday, May 28, 2011

What Are Greeks Fed Up With?

Greeks are gathering to tell their government that they are “fed up.” With no coherent message, however, we are left to guess as to what exactly they are fed up with. A recent public opinion poll by Public Issue gives us a glimpse into that question. Most relevant among the questions was this: how responsible do you hold the following parties for Greece’s debt. The answers ranged from “very” to “little.” What they highlight is that this country still needs a narrative about how it got into this mess; and it also needs its citizenry to own up to its share of the blame.

On top of the list, with near universal (98%) disapproval, are “Greek governments.” The plural form is important: this is not the fault of the current government alone. But how far back does one go? Do people think that it is mostly the fault of the previous government, which admittedly derailed the country’s finances beyond the sorry state they were in to begin with? Or does one condemn the wider political and economic model that Greece has practiced since the restoration of democracy in 1974? Or does one go further back, to the civil war and its polarizing aftermath or even back to the formation of the Greek state? A poll will not capture such idiosyncrasies; but the near-universality of the answer may contain less consensus that is suggested at first.

Next come speculators (89%). This is a bizarre place to put blame, although PM Papandreou often does so. My response to this is, “don’t blame the messenger.” Speculators are of course rushing to profit from Greece’s woes. And their bets against Greece are making it harder for the country to borrow. But speculators did not create Greece’s debt. When they bet against Greece, they are merely a mirror showing us our imperfections. When they distrust the government’s reform agenda, they merely point out the obvious: that Greece’s chances to avoid default are slim and depend on a program that the government is less and less unified in its willingness to implement. Don’t blame the messenger.

Then come Greek banks (70%). This is equally odd. Greek banks certainly acted in a predatory manner – their failure of their loan portfolios demonstrates quite quickly how little due diligence they performed. My own experience tells me of banks pushing out loans to meet targets without brothering to find out if the recipients needed the loans or if they could repay them. And besides tax collectors, banks calling in loans are the chief economic manifestation of the crisis for the average Greek citizen and company. But insofar as Greece’s chief problem is public rather than private debt, banks are not really to blame – they may have bought Greek debt, and in that sense, they failed in their public due diligence as much as they failed in their private due diligence. But again, they did not create Greece’s debt problem.

Next on the list are Big EU states such as Germany and France (67%). I am puzzled by this. Is there some blame on German governments and German companies for engaging in corruption with Greece’s political system? Could such practices have added to Greece’s debt? Perhaps. Are they also to blame for tearing apart the Stability and Growth Pact (SGP)? Indeed. But to hold them largely responsible for Greek debt misreads economic history: they aided and abetted the crime in indirect ways and could have helped prevent it if they put enormous (and unrealistic for the time) pressure on Greece. But again their culpability is a few steps removed.

Next come foreign banks. Foreign banks behaved similarly irresponsibly in their due diligence of buying Greek debt as Greek banks did. Perhaps the 10 percentage points difference between their disapproval rating and that of Greek banks illustrates the lack of immediate contact that Greeks have with those banks. Or it may show that whatever foreign banks Greeks hold responsible, they do so under the umbrella of a “speculator.” Either way, their responsibility is not very high.

Next on the list are Greek citizens, but I want to spend more time on that answer so let me skip ahead to the final answer for a second: the euro. The level of blame that Greeks put on the euro (44%) tells us, first and foremost, just how badly the fear a return to the drachma. If the Euro is to blame, then getting out of it could be part of the solution, but most Greeks are hesitant to reach that conclusion. How about blaming the euro for Greece’s debt? In part the euro helped Greek debt remained low – the effort to enter into the Eurozone was a chief driver behind the stabilization of debt in the 1990s (see here). After that, however, the euro was a debt-enabler, allowing Greece to borrow at interest rates that were increasingly closer to Germany’s. The euro was the excuse that Greek and foreign banks used to avoid doing due diligence.

This brings us to the last culprit: the Greek people. Two obvious observations stand out here are: the big change in the perception of culpability between November 2010 and May 2011: 8% more blame the Greek people than did in November 2010. The second observation is the disconnect of the blame that Greeks put on their governments versus themselves: 98% vs. 52%.

How can such disconnect be explained? Greece is no Egypt under Hosni Mubarak. The governments that Greeks so wholeheartedly blame were voted in repeatedly over the years rather than imposed from abroad or by force. The web that links private choice with public outcomes is obviously complex, and the ability of one person or group to affect the country’s wide political trajectory can be limited. But the wider renunciation of their governments demonstrates an abdication of responsibility: everyone is to blame but me, although the increase in the share of people willing to take a broader view is heartening. It also helps us understand a bit more that 98% of “government blame.” It seems to be more narrowly based on the perception of corrupt politicians rather than a corrupt system of patronage.

As I dissect this poll, a natural question pops up: where would I put the blame? My culprits are Greek governments and the Greek people, although one institution I would also blame (not on the list) is the press, which has been, as a whole, inadequate in investigative journalism to expose corruption and keep the body politic honest.

I would blame Greek governments because, besides the Simitis government that got Greece into the Eurozone, their sole preoccupation was (a) how to profit personally at the public’s expense and (b) how to dole out state patronage to get reelected. Never did they offer a bigger vision for the country, nor where they able to lead the country towards any goal. They prolonged a system rather than try to change anything. The current crisis is an unequivocal condemnation of the statist system created by Andreas Papandreou in the 1980s and perpetuated by his successors. It is that system that needs change.

But I would blame equally the Greek people, not just for voting these buffoons into office, but for demanding favors as a way of life. In the 1980s, statism was “supply driven” in the sense that the A. Papandreou government brought its supporters into the state sector to gain their electoral support. As time passed, however, patronage became demand driven – people came to expect these favors, they visited their representatives to ask for them, and they made their vote conditional on getting them. Besides merely corrupting the electoral process and bloating the public sector, this process also lowered the expectations of a large portion of the Greek people. It is a sad country when a young kid dreams of becoming a public sector employee that goes home at 2 pm and never works. Yet that is what Greece became. Greeks share blame for accepting that reality - and for not demanding more from our politicians and from ourselves.

Monday, May 23, 2011

Europe's Impossible Trinity – Or Why European Leaders are Not as Dumb as you Think

Judging from the majority of the financial press, European leaders are compounding error with error in dealing with the continent's debt crisis; timidity, lack of vision, incoherence – these are the words to describe those currently at Europe’s helm. But that accusation ignores the totality of problems that Europe must resolve. Europe faces three crises, not one: a debt crisis, a political-economy crisis, and a political crisis. And it is almost impossible to deal with all three at the same time.

The debt crisis is the most obvious: several countries – chiefly the PIIGS – are saddled with high public debt levels and thus find it harder and harder to finance their deficits. As a result, yields on their bonds continue to rise, fueling a vicious cycle where borrowing costs increase as markets question the PIIGS’ solvency, which in turn makes them even less solvent. And given the linkages in the continent’s economies, markets fear that a default in one country will inflict wider losses, pushing other countries closer to default.

To resolve this cycle, the EU and the IMF have provided short-term funding to give countries time to tidy up their finances and convince markets to lend them money again at low rates. So far, these measures have failed to bring down bond yields in Greece or Ireland (too soon to tell on Portugal). So the current measures have not resolved the debt crisis, just postponed it, which is one reason most analysts are critical of how Europe has handled the crisis.

The second crisis is how to address the underlying structures that created the debt crisis to begin with. To ensure that the bailout packages are not merely channeling good money after bad, the EU and the IMF are imposing strict conditionality on the loans. Here, the PIGS are distinct from Ireland, whose otherwise sound economy has been derailed by bankers gone wild. The political problem chiefly is a Southern European problem, where high debt reflects (among others) state meddling, tax evasion, rigid labor markets, and regulations that restrict competition.

There are inherent tensions in dealing with these two crises. The proper response to a debt crisis is to either counter with overwhelming firepower or cut one’s losses and default. The tension is that neither overwhelming firepower nor default help foster long-term reform – that depends on winning bailout money gradually through tough actions. Spending money to cover the near-term financing needs of the PIIGS will only succeed if there is a serious effort towards reform, and the momentum towards reform will be sustained only if there is continuous external pressure rather than a blanket guarantee that funds will be available.

Then comes crisis number three which is to ensure political buy-in from people in the funder countries. Northern Europeans are not keen to write checks to subsidize vacations in the Greek isles or to allow for early retirement; they want to make sure that the countries that receive the money make honest efforts to change. The grumbling can be heard most loudly in Germany and Finland, but it exists elsewhere as well. It also coincides with a broader sense of xenophobia and a decreased sense of cosmopolitanism. The real restriction on providing overwhelming firepower is that the people who provide the firepower may be voted out of office. Even worse, they may provide increased space for extremist groups to become more powerful.

In that context, the current muddling through does not look that bad. Option #1, which is to provide overwhelming firepower, has obvious political limitations both in terms of triggering reform in the target countries and in gaining approval in the funder states. Option #2, which is to restructure debt in the PIIGS, has some electoral appeal in the funder countries, but it may not quell the debt crisis since the contagion risks and uncertainty will drag on, nor will it make domestic political reform in the PIGS easier to accomplish. Option #3, which is to provide begrudgingly conditional support, may sustain the uncertainty in the markets but it provides continuous pressure for the target countries to reform and it limits the chances of a political backlash in the north. Among the three, Option #3 does not look that bad.

Sunday, May 22, 2011

Greeks Will Support Major Change

I have written before about Greece’s silent majority that will favor reforms as long as the pain is fairly distributed (see here). A recent poll by Public Issue provides more support for that thesis: it reinforces the idea that if the government had the courage and vision to articulate and implement a broad agenda, the Greek people would welcome it.

The opinion poll is fairly comprehensive and contains several data points. Many are well known: disenchantment with the political class and a growing pessimism about the country’s direction. But there are salient points that the government ought to pay attention to. Three stand out.

First is a sense that Greece politico-economic model has failed and the country needs to change. A full 89% of respondents thought the country needs either radical change (56%) or a revolution (33%). Since 1999, the comparison year, there has been a growing radicalization as those who thought minor changes were sufficient now think a “revolution” is necessarily. Revolution, of course, is a vague term, and those most supporting revolution are the communists. But what is significant is that at least half of those who voted for the major parties (except the communists) thought “major change” was needed.

Second, those who oppose change and are vocal about it consist of a small and concentrated grouping. Only 28% of poll respondents said they protested during the last year, and only 10% did so several (4+) times. In other words, the loud reaction comes from a small group of people. Their attributes are the following:  
  • They are largely drawn from the left with 61% of those who intend to vote for the Communist Party having protested and 85% of Syriza supporters (leftist coalition) having done so. Supporters of other parties tend to protest at the "average rate" of 28%, although only 14% of those who would vote for the ruling PASOK party protested.
  • They are highly educated with those having competed university being four times more likely to protest than those without a high school diploma
  • The age groups with the highest predisposition to protest are 18-24 and 45-54 with about 44% of each having protested. So the protesters are university students and those closest to retirement (many in the age group 55-64 are already retired). The participation rate at the in-between age group (25-44) is around one-third.
  • They are likely to be employees (as opposed to self-employed or unemployed) and they are more likely to work in the public sector than the private sector.
Third, the expectations of the Greek public have become more and more pessimistic, but they have also changed in important ways. On one hand, polls show that most people expect a progressive deterioration in the country with more unemployment, poverty, closure of companies and social tensions. Almost two-thirds think the country will default. But 82% think that state owned companies will be privatized and 62% think life-long tenure for public sector employees will end. These two data points may seem puny, but they reflect a growing acceptance that certain pillars of the country’s politico-economic system will change. That acceptance makes it easier politically for these things to change.

Tuesday, May 17, 2011

Is Roubini Right on Greece?

Nouriel Roubini has written another piece on the PIIGS where he lambasts the EU's approach to dealing with the Continent's debt crisis. His point of departure is plausible, but his analysis is too narrow, and in the end, his assessment is wrong, at least insofar as Greece is concerned. 

His argument rests on three premises: (a) Greece faces a solvency not a liquidity crisis and its debt level is clearly unsustainable - it will thus be forced to default eventually; (b) giving Greece money just delays that inevitable reckoning, so it is throwing good money after bad money; and (c) a Plan B would be better by imposing some losses on bond holders but making them part of the solution rather than the problem and "bailing them in" rather than "out." 

Let us look at each claim in turn. 

Is Greece's debt sustainable? Probably not, but frankly we do not know. If Greece were Argentina, it would have defaulted in the late 1980s; if Greece were Japan, it would have another decade to go before facing any trouble. Greece is neither Argentina nor Japan, but these comparisons should remind us that sustainability is a nebulous term. What makes Greek debt unsustainable these days is that the market thinks it is, and so it demands interest rates which act as a self-fulfilling prophecy. The IMF, for its part, shows that faster (but possible) growth could push Greece's debt levels below 100% by decade's end. Not that this means that Greece's debt is clearly sustainable - it is not. But it is also not clearly unsustainable. Pardon the double negatives, but these are different. 

If Greece's debt can be made sustainable, it is not clear that this is "good money after bad money." But the more important observation is Roubini's assumption that sooner is better for dealing with the problem. As an economist I can sympathize - default and restructuring are painful and they are made more painful by denying and delaying the inevitable. No arguments there. 

Politically, however, this is not so. How a country defaults and when - these questions have political ramifications. Timing and process matters. Consider this analogy: economic sanctions. Now sanctions are hugely contentious, of course, with much debate as to whether they work and in what cases. But one of the arguments in their favor is that they enable diplomatic or military escalation. You ask nicely before you ask not nicely. And having asked nicely makes the harsh asking more tenable. In other words, you can make an effort to avoid default and end up defaulting anyway, or you can just default from the start. Roubini thinks these two outcomes are the same and so a country might as well accept the inevitable. I think he is wrong. 

Put simply, a Greek default in 2012 would likely better than a Greek default in 2010. I don't mean this from an economic standpoint, although that is probably true in the sense that the shifting of liabilities from the private to the public sector will help lessen the contagion from a default. Banks are likely going to be better prepared in 2012, although again I have no qualms about a scenario that imposes losses on Greece's lenders. Plus, if Greece has managed to make a reform or two, a debt-restructuring offer would be more attractive in 2012 than in 2010. 

Instead, what I mean is that this process, much as it may seem futile to the economist, is useful politically and, in the long-term, economically as well. Think about a Greek default in May 2010. We can only guess, of course, but here are likely outcomes: 

First, the Greek government and public would have blamed default on speculators that attacked Greece because of greed and/or other nefarious conspiracy-theory-reasons. Prime Minister George Papandreou has often blamed speculators for the crisis after all. The lesson would be "we defaulted because the speculators decided to make a buck on our plight." 

Second, the government could have fallen, possibly triggering a political crisis with no party commanding a parliamentary majority. Greece could have found itself in a series of elections with no decisive outcome - a plausible scenario if one thinks in retrospect about how poorly all parties have done in the past twelve months in the absence of convincing solutions and inspiring leaders. 

Third, Greece's faith in Europe would have been shaken, weakening the anchor that membership in the EU has provided for Greek politics since 1974. This is what happened when Greece felt abandoned by NATO during the 1974 crisis in Cyprus. The urgency to enter the EU (EEC at the time) was driven by a feeling that NATO did not stand by Greece in a crisis and that the country needed to hedge its political bets. 

To go back to my favorite theme, Greece does not face a debt crisis - it is a political crisis whose most apparent manifestation is debt. Now imagine Greek politics after a May 2010 default, and compare that to what has happened instead. I am assuming, of course, that none of the conditionality, none of the troika visits, none of the benchmarks would occur in the "May 2010 Default" scenario. I say that because even assuming an orderly restructuring, external influence would peak at the start of the exchange (to agree on the terms) rather than be retained throughout. More importantly, it is hard politically to declare default and present a series of tough reforms at the same time - versus a scenario where measures are introduced in an effort to "avoid the humiliation that comes with default." 

This is not good money thrown after bad money as much as it is good money trying to buy political reform. Europe and the IMF are being "bailed into" Greece in an effort to create political change. Tough as these years may be, Greece has made changes that governments have failed to pass for decades. The remaining agenda is enormous, and the resolve and unity of the government can be questioned at times. Yet there is space for the country to start discussing taboos such as tenure for public sector employees, privatizations, and the relationship between the market and the state. This is aided of course by continuous external pressure to both pass and implement changes - in a way that would have been difficult in an "early default" world. 

This is a more serious effort to come to terms with the deep structural causes of the crisis. By no means is the debate complete, but in the event of a Greek default, we would have ended up with lots of finger-pointing. Now we have finger-pointing paired with a reform program that is worth the name. 

Now think of a default in 2012. Several of the political shocks will remain of course. But the country has crossed some psychological thresholds. It is one thing to say "we defaulted because George Soros was out to get us," and it is another altogether to say, "we were handed €110 billion and still managed to default." These two defaults may end up looking similar on paper and on the numbers. But they are a world apart politically. And that distance matters for Greece in the end.

Saturday, May 14, 2011

Is Argentina a Model for Greece?

For the past few days, and a result of an op-ed in the NY Times by Mark Weisbrot, there is more buzz about the merits of Greece leaving the Eurozone. I have written about this subject in the past, but I thought I would make some more observations about this idea. 

Before looking more closely at the analogy, permit me two metaphors: Greece as a gambler with a debt problem and Greece as a fat prostitute. Now, the gambler can declare bankruptcy – the debt is gone, but the underlying cause that created the debt (the gambling addition) is untreated. Now think of the prostitute – her options to get more business are to hit the gym and eat right or to lower her price. In effect, the argument for Greece to default is akin to the gambler declaring bankruptcy but skipping out on the gamblers anonymous meetings; and dropping the euro is akin to the prostitute lowering her price. In other words, it solves a problem, but not *the* problem. 

With the caveat that my knowledge of Argentina is more limited than my knowledge of Greece, I would like to make a few observations: 

  • Greece’s external balance is much worse than Argentina’s was before 1999: Argentina was running current account deficits of ~3.5% of GDP, while Greece’s 2010 current account deficit was 8.5%. So a sharp depreciation that would result from Greece exiting the euro would produce a more significant dislocation in Greece than in Argentina. 
  • Greece has a lot more state than Argentina: Argentina’s government revenues and expenditures were averaging ~25% of GDP before the crisis. By contrast, Greece’s numbers have ranged from high 30s for revenues to mid 50s for expenditures. So Greece needs to make a sharp curtailment in the state sector – neither default nor a new currency accomplishes that. 
  • Argentina has failed to produce macro-economic stability with inflation ranging from 8% to 10%, with one exception (2009). In other words, it has not resolved the propensity to run budget deficits – it has just shifted the financing mechanism from borrowing to printing money. 
  • Argentina is ranked 105th in Transparency International’s Corruption Perceptions Index 2010, tied with Algeria, Kazakhstan, Moldova and Senegal. In 2001, it was ranked 57th. The Heritage Foundation / Wall Street Journal Economic Freedom indicator shows that Argentina has experienced a sharp decline in economic freedom over the last ten years – the drop is similar to that experienced by Venezuela and just smaller than Bolivia’s. 
  • Looking at one sector I know well – natural gas – Argentinean is in a free fall: production, despite ample reserves, has fallen as companies refuse to invest. Exports have almost halted and imports have grown rapidly. Subsidized prices are fueling an unsustainable supply and demand dynamic. This subsidy to the rest of the economy has produced growth – but at a huge expense of an industry that will hit a brick wall unless it reforms quickly. 
I know these observations do not cover the Greece-Argentina comparison fully. There are indeed some positive numbers to look at in Argentina. But did default help Argentina resolve structural weaknesses in its political economy? Not really. 

And so the question is this: is Greece’s problem debt or is it a corrupt political system, an inefficient public sector built on clientelism, a highly regulated private sector that restricts competition and hampers entrepreneurship, and a weak state that cannot collect taxes or enforce decisions? If anyone thinks that taking off a few zeros from Greece’s debt or switching to a new drachma will eliminate these chronic problems, they are out of their minds. Greece faces a deep political crisis, not a debt problem. It needs political solutions, not financial engineering. 

Sunday, May 08, 2011

D-Day for Greek Debt

Unless done early and voluntarily, a Greek default would be triggered by an inability to borrow, and that inability will be linked to money that the Greek state would need to raise in order to roll over debt. Remember that when Greece received its bailout in May 2010 it was ahead of a bond due on May 19, 2010 that the government said it could not pay. That set the timing for the rescue package. The problem is that Greece’s amortization needs in 2012 are frontloaded, meaning that the moment of truth comes early in 2012. On March 20, 2012 to be exact. 

Greece has two expenditures for which it needs to raise funds: to finance its budget deficit and to roll over existing debts. To meet these, the government has three main financing options: privatizations, market borrowing and IMF/EC loans. From mid 2010 and in 2011, Greece met its needs by raising money in the short-term market and by borrowing from the IMF/EC. It did not need to raise money in the long-term market, where mistrust about the country’s ability to pay back debt has pushed up yields. 

That changes in 2012, however. According to the IMF, whose estimates will rise in lieu of a bigger than expected drop in GDP in 2010 and a smaller than expected drop in the deficit, Greece needs to raise €27 billion in 2012 from long-term bonds. This number is driven by a large amortization requirement: according to the IMF, in 2011 Greece needs to pay down €35.2 billion in long-term debts and €10.3 billion in short-term debts. The Ministry of Finance, which publishes the graph below, shows a 2011 repayment need of ~€40 billion. 

But when are these debts due? For now we can ignore the smaller amounts from short-term debts – these are usually €1-€2 billion and are unlikely to be the trigger of a default. Looking at long-term debts, 80% are due in the first half of 2012. Most worrisome are two 3-year bonds that are payable on March 20, 2012. Combined they account for over €21 billion. A third, 10-year bond for €8 billion is due May 18, 2012. 

We can therefore call March 20, 2012 Greece’s D-Day. If the Greek government continues to bet that it can avoid default, this day will be its ultimate test – the day by which Greece will need to convince markets to lend it another €21 billion.

Wednesday, May 04, 2011

Greece: A Year since the Bailout

It has been one year since Greece signed an agreement to receive €110 billion from the IMF and the Europeans. Where does Greece stand today?

First, Greece made a big adjustment effort, cutting its budget deficit from 15.4% of GDP in 2009 to 10.5% in 2010. This is not quite as large as previously thought, and the economy's challenges remain huge, but it is still an enormous change (see here).

Second, it is now clear that Greece can default without having to leave the Eurozone. In mid 2010, the fear was that Greece would not only have to restructure its debt but could also be forced to drop the euro and re-launch a new currency. This seems less likely now: the EU is setting up a structure to allow debt-ridden countries to restructure without dropping the euro. This change has major implications for Greece: it contains the impact of default to economics. Being thrown out of the Eurozone would have sparked a deep systemic crisis in Greece's politics (see here). This now seems unnecessary.

Third, there is finally some momentum towards honest accounting. Greek statistics, which had a horrid reputation for years, are starting to be rehabilitated. The government is trying to conduct an inventory of spending at the central and sub-national levels. Budgetary and spending transparency has risen. Information about public sector employees in the government and state-owned enterprises is not only collected but shared with the public and press. Public property is being cataloged. The government is waging a serious campaign to provide more truthful data. This is great news since lack of honest accounting and lack of accountability go together (see here).

Fourth, taboos some taboos are becoming less taboo. Lifelong tenure for public sector employees could be on the table for discussion. University asylum, which is a guise under which “anarchists” wreck havoc, is now being debated. The public is more supportive of privatization of state-owned companies (see here). What is more, it is the government that is highlighting many of the absurdities in the country. One used to hear complaints in the country's coffee shops over backgammon and frappe. Ministers are now the ones speaking those same words. The debate is not yet far reaching – but it is starting.

Finally, there seems to be support for change. The ruling party has enjoyed the support of a silent majority which recognized the inevitability of its program even though it could not cheer its harshness. In clashes between unions and the government, the public has sided with the government. More Greeks understand the country’s condition and what needs to happen. But their support is conditional: it depends on the burden being shared equally. When the government showed signs of favoritism, public support for the government fell (see here). There are vested interests resisting change, and there are people in the ruling party who do not want to antagonize those interests. But there are more signs that if the (divided) government were to pick big battles, the public would be on its side.

In one year, Greece has changed quite a bit – but it has also remained the same quite a bit. It is easy to look at the next few years and be dismayed. The remaining challenges are enormous and reform has to be squeezed to a very short period. But if one looks back at the past twelve months, there are also good sings – of a government trying to do good and actually doing good much of the time and of a people who will begrudgingly accept a weak economy in the name of reform that is fair. Not the best of times; but not the worst either.

Sunday, May 01, 2011

Are Greeks Finally Embracing the Market?

A survey by Public Issue shows much stronger support for the market than previously assumed. On one level, this survey demonstrates increased awareness that a bloated public sector is at the center of the country’s failed economic model, and that growth depends on a stronger private sector. But in a broader sense, this survey can accelerate political change, helping to convince members of a torn administration that wholesale reform can be a political winner.

The Public Issue survey, conducted in tandem with Kathimerini (here) and Skai TV (here), shows the following:
  • 58% of respondents say public sector employees should not have lifelong tenure. The share of those supporting tenure fell from 40% to 35% within a year.
  • 74% think privatizations are essential; only 21% doubt they are needed.
  • 69% think the country needs to strengthen the private sector to generate growth.
  • Support for privatizing state-owned companies has increased across the board, with the most dramatic changes seen in railroads (65% say yes vs. 41% in 2008), Postal Savings (54% vs. 32%) and gaming company OPAP (60% vs. 46%). Support for privatizing the power company has also risen from 40% to 48%, but the public remains torn. Only for the National Bank of Greece has there been a fall in the support for privatization.
This survey reveals that Greeks are dismantling whatever rosy notions they may have entertained about the public sector. For years, the Greek citizenry has held a view towards the public sector akin to what Ashleigh Brilliant had said about corruption: “I either want less corruption, or more chance to participate in it.” Now more and more Greeks recognize that the country can no longer afford a large, inefficient, unaccountable, and generous public sector. What is more, they seem ready to talk about abandoning lifelong tenure, the most precious prerogative of public sector employees. Given the centrality of the public sector in Greece’s economic model in the last thirty years, this is good news.

More broadly, these results demonstrate again that there is a public sentiment that favors tackling privileges in the public and private sectors. In the past I have written that the failure to tap into that sentiment, to articulate its frustration and to galvanize its anger into constructive change is PASOK’s greatest failure (see here and here). In part, it is a communications failure and in part it is unwillingness to alienate constituencies that have formed the party’s backbone for decades.

But more generally, it is a failure to appeal to a wide political base without promising patronage: to court votes through vision rather than favor. This survey shows that there is indeed a large repository of support for abandoning the economic model of the last thirty years, and that the Greek citizenry will not rally to support either public sector unions with exorbitant salaries or professionals who resist competition in their sectors. The more this point becomes clear to the Greek leadership, the easier it will be to re-create consensus at the top in favor of real change.